How to Hedge 7 Retirement Risks

There are many things that could go wrong with your retirement plan. You could develop a health problem, lose money on your investments, or simply watch inflation slowly reduce what your savings can buy. A recent Society of Actuaries survey of individuals ages 45 to 80 identified older Americans' biggest concerns, and what current retirees are doing to cope with them. Here's how to manage seven of the biggest retirement challenges:

Inflation. Inflation will erode the purchasing power of your retirement savings over time. Most retirees (69 percent) and pre-retirees (77 percent) are concerned about the value of their savings keeping up with inflation, the telephone survey conducted by Mathew Greenwald and Associates and the Employee Benefit Research Institute found. Social Security payments, some pension and annuity payments, and Treasury Inflation-Protected Securities are adjusted each year to keep up with inflation. "The first place to start is Social Security claiming and seeing if you can claim later," says Anna Rappaport, chairperson of the committee on post-retirement needs and risks at the Society of Actuaries. If you can increase your initial Social Security benefit amount by delaying when you sign up, you will increase the dollar value of your annual inflation adjustments. Other strategies for keeping up with rising prices include keeping some money in the stock market, investing in real estate, or continuing to work part-time at current wage levels.

Healthcare costs. The majority of older workers are worried about having enough money to pay for adequate healthcare (74 percent) and long-term care in a nursing home or at home (66 percent). To prepare for potential medical problems, most retirees say they are aiming to maintain healthy lifestyle habits (82 percent) and have purchased supplemental health insurance to Medicare or are participating in an employer-provided retiree health plan (65 percent). However, just a third of retirees are saving specifically for the possibility of having large health expenses, and only a quarter have bought long-term care insurance that would help pay for nursing care. "People need to think about, if they can, working until 65 when they are eligible for Medicare," says Cindy Levering, chair of the pension research team at the Society of Actuaries. "If you can delay that until 65 and stay under the active employer plan for as long as possible, I think that is very important."

Running out of money. After decades of saving for retirement, you need to make sure that money lasts the rest of your life. Many older workers are concerned that they will deplete their savings too quickly (63 percent) and won't be able to maintain a reasonable standard of living for the rest of their lives (64 percent). Many married retirees also worry about their spouse's ability to maintain the same standard of living after their death (45 percent) and being able to leave money to their children or heirs (38 percent). To prevent themselves from spending down their savings too quickly, most retirees (57 percent) have a plan for how much money they will spend each year in retirement and where that money will come from. Many retirees report that they have eliminated consumer debt, including credit cards and loans, paid off their mortgage, and found ways to cut back on spending.

Investment losses. Stock market losses can be especially devastating for retirees. Many workers approaching retirement age (56 percent) are apprehensive that their investments will lose value in retirement. To reduce investment risks, many retirees move their assets to less risky investments as they age (47 percent) and purchase products or choose employer plan options that provide them with guaranteed income for life (33 percent). It's important to maintain a cash cushion in retirement so that you can avoid selling investments while they are down in value.

Living longer than expected. A major retirement planning difficulty is that you don't know how many years of retirement you should save for. Most people underestimate how long they will live. When asked to estimate how long the average person can expect to live, the majority of retirees (62 percent) and pre-retirees (57 percent) provide a response that is below the average. And, of course, many people will live significantly beyond the average life expectancy. To be safe, many financial planners recommend that healthy people plan as if they will live until 100.

Falling home values. For most people, a home is their most significant financial asset. If you own a home without a mortgage, you have eliminated a significant retirement expense. You could also downsize to a smaller home in a less expensive area and add the profit to your retirement savings or tap your home equity for emergencies. However, many home-owning retirees (44 percent) say they are concerned that the equity in their home may not be sufficient to support their retirement plans. "Unlike stock prices that have come back somewhat, housing prices really haven't," says Rappaport.

Forced retirement. While many current workers are aiming to retire at age 65 or later (55 percent), most current retirees (82 percent) left the workforce before the age of 65 (82 percent) and almost a third (31 percent) retired before age 55. Many people find themselves forced into retirement earlier than planned due to a health problem, disability, job loss, or to care for a spouse or family member. An unplanned early retirement can significantly weaken your financial security because there are now extra years you will need to finance. It's a good idea to keep your skills current and your resume polished in case you need to find a new employer in your final years in the workforce. The good news is that many early retirees eventually return to paid employment, SOA found, typically using the same training and skills in their new job as they used before retiring.

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